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Essay: Thesis: Practical suggestions for the current economic performance of Saudi Arabia.

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Abstract
The Kingdom of Saudi Arabia is a country blessed with large crude oil reserves around the world. However, simply depending on the oil industry will lead Saudi Arabia to an unpredicted future. Therefore, the Saudi government is enhancing the ability for attracting more FDI in Saudi Arabia by a series of policies. Based on this background, this thesis studies the role of foreign direct investment in Saudi economy by introducing Saudi economy in the several aspects: oil industry, non-oil sectors, private sectors, foreign trade and current situation of FDI in Saudi Arabia. An empirical study is given to test the causal relationship between FDI inflows and the economic growth using Granger causality test. Meanwhile, a simple regression is also given to analyze the role of FDI inflows compared with the other two variables: oil prices and foreign trade openness. I extend this research by analyzing the role of FDI inflows to Saudi economy from both the long term and the short term. The long term period is from 1970 to 2010 while the short term period is from 2006 to 2012. It is found that, from the long term, there exists a positive relationship between FDI inflows and the economic growth, and from the short term, FDI inflows have a negative impact on Saudi economy. This is due to the reason of the influences from the global market such as the financial crises. This thesis also provides some practical suggestions for the current economic performance of Saudi Arabia.

Key words: FDI inflows, oil prices, foreign trade openness, GDP growth, oil sector, non-oil sector, private sector

Lists of Abbreviations

‘ FDI: Foreign Direct Investment
‘ GDP: Gross Domestic Product
‘ ARAMCO: Arabian-American Oil Company
‘ OPEC: Organization of Petroleum Exporting Countries
‘ KSA: Kingdom of Saudi Arabia
‘ UAE: United Arab Emirates
‘ OECD: Organization for Economic Co-operation Development
‘ PIF: Public Investment Fund
‘ SIDF: Saudi Industrial Development Fund
‘ KACST: King Abdul Aziz City for Science and Technology
‘ OIL: Oil Prices
‘ OPEN: Foreign Trade Openness
‘ MENA: Middle East and North Africa

 

Chapter 1 Introduction

1.1 Research Background

The Kingdom of Saudi Arabia is the country with the largest oil reserves around the world. However, simply depending on the oil industry will not lead the country to sustainable development and a bright future. Since 1960s, the government of Saudi Arabia started to attract FDI and raise the contribution of the private sector in order to create another way of stimulating its economy. Nowadays, the Saudi Arabian government has widely accepted the idea that the economy should not only depend on the oil industry but also on the ability to attract FDI in an increasing level. Therefore, my research on the role of FDI in Saudi Arabian economy is significant in terms of theory and practice.
1.2 Aims and Objectives of the Research
Foreign Direct Investment, or FDI, has been described as a process where an investor from a certain country obtains the ownership of assets in another country in order to make profits or acquire scarce productive resources. During this process, the financial resources, technologies and other human capitals will be transferred from the home country to the host country. Therefore, FDI is very critical for the developing countries and the newly industrializing countries in terms of the economy growth such as Saudi Arabia.
Different papers have studied the relationship between FDI and the macro economy in different countries, and Saudi Arabia is a good case to explain how FDI influences the economy growth. My research studies the nature of FDI in Saudi Arabia by discussing the distribution of FDI, providing detailed information about the different sectors in need for FDI, and also, conducting an empirical study that tests the impact FDI has on the Saudi Arabian economy. The aims and objectives of my research is to study the relationship between FDI and economy growth in Saudi Arabia and to what extend the FDI can influence on the Saudi Arabian economy.
1.3 Thesis Outline
This research is divided into 6 chapters. Chapter 1 briefly introduces this thesis from its background, aims and objectives, and the outline. Chapter is the literature review, introducing the former studies on the relationship between FDI and the economic growth. Chapter 3 is an introduction about the Saudi economy in terms of its oil industry, non-oil and private sectors, foreign trade and current conditions of FDI. Chapter 4 is the methodology design of this research while chapter 5 is the empirical study using Granger causality test and a simple regression. Chapter 6 is the conclusions and recommendations of this thesis.
Chapter2 Literature Review
2.1 Overview
Since the last two decades, FDI has become the most effective and important factor in the economy growth, especially for the developing countries. Almost every emerging economy tries to create a stimulating and encouraging policy environment to attract as much FDI as possible to their countries. Indeed, FDI leads to a win-win situation where both the host and the home country could benefit from it. The home country benefits from expanding its markets while the host country takes advantage of the technological spillovers and managerial skills. Furthermore, the global market integration eases the way for this unprecedented growth of FDI around the world.
2.2 Literature Review
The theory of FDI was started from 1960s. Experts put forward a series of hypothesis concerning the motivations and the effects of FDI. In general, these theories can be divided into two parts: one is the discussion of the causes and motivations of FDI; the other one is the study on the effects of FDI in the host countries. Economists believe that FDI plays an important role in the economic development, especially in the developing countries.
The main research on the causes and the motivations of FDI were developed by J. Dunning, S. Hymer and R. Vernon. Heckscher-Ohlin (1960) tried to explain FDI in the Neoclassical Trade Theory. In his model, he suggested the case of two different countries with two different commodities which require two different factors of production. For example, country A is abundant of capital while country B is abundant of labor, then country A ought to produce the capital intensive products. And also, country A will move its production to country B due to the cheap labor, which can be taken as the FDI activity from country A to country B.
Vernon (1966) stated that there are three stages of production in his product life circle model, which explained FDI in the developing countries from another point. First, the production of a certain products starts with all the available factors such as technology and skillful labors in the developed countries. In the second stage, the production does not need any further development and is about to be transferred from the developed countries to the developing countries as a part of foreign investment. Then the third stages starts where the production moves to the developing country due to its cheap labor and costs.
Dunning (1974) analyzed the factors in decision making of FDI and stated that different factors must be put into consideration before making decisions such as individual characteristics, relationships between the two nations and structure of the organization. He also concluded the three factors of FDI: Ownership, Location, Internalization, or OLI model. These three factors result to the causes and conditions of an investor’s FDI. Ownership and Internalization are the abilities of a company in terms of direct investment. And also, they are the reasons for the possibility that the companies could learn and imitate technology from the company of home countries. Location determines the ability of host countries attracting FDI. Therefore, geographical conditions and infrastructures are the important factors of host countries in terms of attracting FDI.
These are some early researches regarding the FDI. Other new studies have been done in recent years. These researches shed light on the role of FDI in the economy of host countries. Economists have agreed that FDI ought to be treated as a supplement to domestic capital and is a good way of acquiring new technology, thus enhance the efficiency of the production.
Caves (1996) asserted that the reason for an increasing number of the countries which are very attractive to FDI is that they are trying their best to maximize their output. The technology transfer will be beneficial to these countries during the FDI process. The personnel development and the access to the international markets have also been one of the major benefits that developing countries, like Saudi Arabia, have been keen to acquire. Therefore, these countries which benefits most from the FDI will be on the top of the global economy.
Moreover, Bornstein (1998) stated that FDI is a very essential tool for the maximization of growth of any country that desire to play an important role in the world economy. De Gregorio (2003) observed that any country which has a high level of ability to attract FDI is well performed in terms of its own economic growth because of the improvement of technology and the knowledge coming from the FDI. The FDI has also proved to be more efficient than the local domestic investments which do not have better systems and technology to handle the production process efficiently and have the costs of the products at the lowest. Bornstein, et al. (1998) noted that FDI has a direct impact on the economic sectors of the host country, particularly the locals’ private sectors. Blomstrom (1994) found that there is a positive correlation between FDI and economic growth in Indonesia and Mexico. Besides Blomstrom (1994), Mellow (1997) and Marcusse (1999) also found positive correlation between FDI and the economy.
The importance and effects of FDI inflows has been concerned for many years. Many economists tried to explain it from their point of views. Countries having higher per capita GDP will be more attractive for FDI inflows (Schneider, 1985). And inflow of FDI will be influenced by macroeconomic performance of that country too (Santiago, 1987). Meyer (2003) stated that the economic globalization has led to greater competition for FDI inflows and, FDI inflows and GDP are positively related.
Almost all the conclusions from the researches above indicate that there exists a positive relationship between FDI and the economic growth. However, some cases are not such evidence. Piritta Sorsa (2003) found that FDI did have a negative impact on some economies. Another case is a study held by Pradeep Agrawal (2000). He found the relationship between FDI and the economy growth was changing through different period of time by studying the economies of five south Asian countries: Pakistan, India, Sri Lanka, Nepal and Bangladesh from 1970s to 1990s. This is due to the change of import substitution policies and import tariffs.
Chapter3 Saudi Arabian Economy
3.1 Introduction
Saudi Arabia, officially known as the Kingdom of Saudi Arabia, is the largest Arab state in the western region of Asia in terms of land area. It is bordered by Jordan and Iraq to the north, Kuwait to the northeast, Qatar, Bahrain and the United Arab Emirates to the east, Oman to the southeast, and Yemen in the south. It is the only nation with both a Red Sea coast and a Persian Gulf coast.
Geographical conditions determine the economic environment in some cases. The vast lands and the position near the Red Sea and Persian Gulf offer Saudi Arabia with a better opportunity for economic development. Riyadh and Jeddah are two active economic cities in Saudi Arabia, and Dhahran is the major center for the oil industry where the biggest oil company ARAMCO is located. Besides, the traditional culture also plays an important role of economic development. The Kingdom of Saudi Arabia serves the two Holy Cities Mecca and Madina which are visited by millions of Muslims every year. This brings Saudi Arabia a powerful economic resource.
Since the discovery of crude oil in 1938, Saudi Arabia has successfully transformed itself from a desert country with barren lands and lacking resources to a competitive economy around the world. In recent years, the economy of the Kingdom of Saudi Arabia is becoming stronger and more competitive both regionally and globally. The Kingdom of Saudi Arabia is a resource-rich and labor importing economy in the Middle East and North of Africa (MENA) region, and it is also a member nation of the Gulf Corporation Council (GCC), which consists of six countries: the Kingdom of Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Oman and Kuwait. The nominal GDP of Saudi Arabia accounts for 25% in the GCC and it is about half of the total GDP of the other five countries. According to a recent report published by World Economy Forum, the Kingdom of Saudi Arabia ranked the 24th of the most competitive economies around the world and the 3rd in Middle East and North Africa region.
The government of Saudi Arabia also takes full advantages of its abundant oil reserves to attract advanced technology. Its economic structure has been transformed from simply depending on oil production to a diversified one. At the same time, Saudi Arabia accelerates its pace of economic reform and creates a free and easy atmosphere for investment. It is one of the world’s fastest growing countries with a per capita income that is forecasted to rise to $33,500 by 2020, and the largest free market in the Middle East and North Africa region. Saudi Arabia is also a place which is attractive to the FDI because it is the easiest country in registering of property process compared to the other nations in the Middle East.
3.2 Saudi’s Development Plan
Saudi government launches an economic plan every five years since 1970 to serve as an economic goal for progressive development. When referring to Saudi economy, the Development Plan cannot be neglected because the status of it in terms of the economic growth. Here, we give a brief introduction about every Development Plan from different period of time in terms of their objectives and significance.
The First Development Plan 1970-1974 targeted an average annual real GDP growth rate of9.8%. What was achieved, however, was almost double that (18.7%). This was made possible by favorable circumstances, including an increase in oil revenues that allowed the government to increase spending from a planned SR 41.3 billion to SR 78.2billion (an 89.3% increase over the planned level).
The increase in government spending continued during the Second Development Plan 1975-1979. Total government spending amounted to SR 681.3 billion, which was 8.7 times greater than the level of the First Development Plan. GDP (at constant prices of 1999) rose at an annual rate of 5.6%. This was attributed to the increase in growth of the non-oil production sectors, which grew at an average annual rate of 9%, while the oil sector’s annual growth rate was recorded at 2.4%. Valued added of the government sector also realized real growth rate of 5.5%, while that of the private sector was 10.1%. In fact, the main development directions during the Second Plan deepened with the significant increase in government expenditure by an average annual rate of 39.6%.
During the Third Development Plan 1980-1984, the planned level of government spending was SR1200 billion, which was nearly twice the value of actual spending during the Second Development Plan. By the end of the Third Development Plan, actual spending amounted to SR 1,213billion, due to a sharp increase in government revenues. During that period, the role of the private sector became stronger and the value of its gross fixed capital formation at current prices increased from SR 37.7 billion in 1980 to SR 50.2 billion in 1984. The total value of these contributions amounted to SR233.1 billion during the five years of the plan, i.e. an increase in private investment of 10.3%, which was mainly attributed to the government policy of providing easy-term financing for encouraging the private sector to increase its investment. Besides, the adverse impact of the Iraq/Iran war on oil exports and construction, the GDP at constant prices decreased from SR 485.4billion in 1979 to about SR 432.8 billion in 1984, equivalent to an average annual rate of -2.3% during the Third Development Plan.
The Fourth Development Plan was characterized by a substantial decline in oil revenues, because of lower oil prices on the global market. This resulted in a decline in actual government spending to SR 802.1billion compared to the planned amount of SR 1,000 billion. As a result, real GDP growth rates averaged only 0.6%annually during the plan period. Nonetheless, development efforts continued to extend support to different economic sectors, foremost of which was the agricultural sector, which realized high growth rates that reached an annual average of 13.4%. Likewise, the petrochemical industries sector took a quantum leap by growing at an average annual growth rate of 47.3%. Public utilities also realized an average annual growth rate of 6.4%, while the oil and natural gas sector realized an average annual growth rate of 4.4%during the plan period.
The Fourth Development Plan focused on a new strategic direction that aimed at increasing the value added generated by the oil and natural gas sector. At that time, it had also become evident that it was necessary to concentrate on petrochemical industries, which enjoy comparative advantages and high value-added. Accordingly, priority was given to petrochemical industries and investments to develop these industries were made available. The Fourth Plan is also characterized by other positive achievements: an increase in the average annual growth rate of non-oil exports from 18.0% during the Third Development Plan to 29.3% during the Fourth Development Plan and a decrease in imports at an annual rate of7.8% during that period. In general, domestic production, especially that of consumer and agricultural commodities, increased, and the rate of import substitution of these commodities also increased. Also, the private sector’s share in total investments increased to54.9% during the Fourth Development Plan, amounting to SR 239.2 billion inconstant prices of 1999.
During the Fifth Development Plan 1990-1994, the average annual growth rate of real GDP was 4.5%, which of the private sector was 2.2% compared to 2.9% for the government sector and 9.7% for the oil sector. The accelerated growth in GDP is attributed to the high growth rate of the oil sector and the subsequent increase in oil revenues during those years.
The total value of private investments amounted to SR 283.6 billion; growing at an average annual rate of 5.9%, while government investments amounted to SR 178.8 billion. The value of total government spending amounted to SR 1078.1 billion mainly due to the increase in oil revenues. During the plan period, the balance of trade realized a surplus averaging around 15.6% of GDP.
In general, actual spending of development agencies (sectors) during the first five development plans reflects the government’s continued policy to provide the necessary expenditure to develop their major sectors. Government spending at current prices jumped from SR 34.1 billion in the First Development Plan to SR 347.2billion in the Second Development Plan and almost doubled to SR 625.2 billion in the Third Development Plan to meet the increasing requirements of large scale development. However, spending then dropped to SR 348.9 billion during the Fourth Development Plan and to SR340.9 billion during the Fifth Development Plan.
It is interesting to note that a new phase of development priorities started with the implementation of the Fifth Development Plan 1990-1994. The objectives of that plan focused on modern developmental needs foremost of which were: accelerating the development of science and techno-logy, improving the quality of production, raising performance efficiency of institutions, bolstering competitiveness of the economy, restructuring of the economy and diversification of its activities, promoting institutional development, ensuring economic stability, improving welfare and quality of life, giving special care to environmental standards and preservation of the environment, and realizing balanced regional development. The Fifth Development Plan paid special attention to the development of production sectors, basic industries, petrochemical industry, agriculture and agro-industry and other activities. Moreover, greater attention was given to the role of the private sector in increasing the volume of investments and expanding the Kingdom’s production capacity.
Over the Sixth Development Plan 1995-1999 the strategic directions focused on development of human resources, raising labor productivity, and improvement of living standards. Actual expenditure on development sectors amounted to SR 420.4 billion of which SR 216.6 billion were spent on development of human resources, representing 51.5% of total expenditure on development sectors, while the total expenditure on development sectors amounted to about SR 967.2 billion during the plan period. The Plan also maintained the stability of consumer prices and the value of the national currency, as the inflation rate averaged1.2% per year, a low rate that mirrors the general economic stability of the Kingdom. The Plan also concentrated on increasing the share of non-oil sectors in real GDP namely from 51.2% in 1969 to 69.7% in 1999, the last year of the Sixth Development Plan.
In general, the Plan achieved a real average annual growth rate of 1.6%, which was only due to the decline in the growth of the oil sector GDP during the Plan period.
The Seventh Development Plan (2000-2004) adopted general objectives that enhance the previous plans’ achievements while ensuring adapting to changing conditions over time. The plan accorded priority to human resources development and the creation of employment opportunities, along with implementation of privatization, policy improvement in production and organizational efficiency of government agencies, improvement of public services, strengthening technological development, in addition to adjustment in a flexible and efficient manner to global economic developments.
During the Seventh Development Plan, on-oil sectors achieved real annual growth averaging 5%, leading in turn to an increased GDP contribution of these sectors amounting to 71.5% in 2004. The private sector achieved real annual growth that averaged 5.9%, thus increasing its GDP contribution to 53.9% in 2004. This was made possible by the expansion of private investment, which posted a real annual growth rate averaging 7.8% during the plan period.
Positive developments in terms of foreign trade and the balance of payments were also seen during the Seventh Development Plan. The trade surplus improved, which in turn strengthened the current account position. In 2004, the surplus in this account stood at 30.4% of GDP.
Increased government spending represented one of the salient features of the Seventh Development Plan. The value of total government expenditure amounted to SR 1239.2 billion, out of which about SR 485.3 billion were allocated for spending on development sectors as follows: SR 276.9 billion, or57.1%, was allocated for human resources development; SR 92.6 billion or 19.1% for social and health development; SR 61.4 billion or 12.6%for infrastructure; and SR 54.4 billion (11.2%) for economic resources development. Accordingly, total actual government spending on development sectors during the Seventh Plan was 15.4% higher than that of the Sixth Development Plan.
The Eighth Development Plan (2005-2009) is considered the first stage of the strategic economic path for the national economy extending to the coming 20 years and containing four successive five-year plans. This represents an improvement in the strategic planning methodology in the Kingdom.
The main objectives of the Plan comprised the following:
To raise the standard of living, improve the quality of life and provide job opportunities to citizens through acceleration of the development process, increasing the rates of economic growth along with ensuring enhancement in the quality and quantity of education, health and social services.
To develop human resources, upgrade their proficiency and increase the supply of manpower to meet the needs of the national economy.
To diversify the economic base with due emphasis on promising areas, such as manufacturing industries, particularly those with intensive use of energy and energy derivatives, as well as mining, tourism and information technology industries.
To improve the productivity of the economy, enhance its competitiveness and prepare it to deal in greater flexibility and efficiency with economic changes and developments at the national, regional and international levels.
To enhance the private sector’s participation in socio-economic development.
To achieve balanced growth throughout all regions of the Kingdom and to reduce the development gap between them.
To develop science and technology, informatics, scientific research and technology development in order to enhance the efficiency of the national economy and to move toward a knowledge economy.
During the Eighth Plan the national economy realized positive growth rates in GDP, capital accumulation, foreign trade, balance of payments, development of manpower and private sector contribution in the economic activity. This was a result of the combined effect of two fundamental factors. The first factor was the extensive efforts to develop the business environment, expand private sector participation, and to develop the system of basic infrastructure and the industrial and technological cities. This approach contributed to raising the rates of investment, employment and productivity in different economic sectors, thus raising the level of production and improving the quality of life of citizens. The second factor was the tangible improvement in the international economic environment during most of the period of the plan. This enhanced the plan’s chances to achieve its major objectives. Oil prices continued to rise until the first half of the fourth year of the plan 2008, but declined relatively with the entry of the global economy into a financial crisis which leads to a global economic recession.
The national economy continued to improve over the period of the Eighth Plan as real GDP increased at 1999constant prices from SR 749.5 billion in 2004 to SR 993.3 billion in 2009, thus registering an average annual growth rate of 5.8%, a good performance given the severe consequences of the global crisis. As a result, per capita GDP continued to improve.
Growth of real GDP during the Eighth Plan is attributed to the high level of investments implemented during that period and the enhanced level of productivity in many sectors. The average annual growth rate of investment during the plan reached13.4%, raising the share of investment in real GDP to 34.2% by the end of the plan (2009), compared to 24.1% in 2004.
Under the Eighth Development Plan a notable increase in the role of the private sector in different sectors of the economy materialized, enhancing its contribution to GDP, contributing to the diversification of the economic base and to the gross fixed capital formation, in addition to the provision of job opportunities for Saudi workers and the development of non-oil exports.
Over the years of the plan, private sector’s contribution in GDP value increased from SR 404.1 billion in 2004 to SR 633.5 billion in 2009, increasing its contribution to real GDP from 53.9% to63.8% during that period. Real private sector investment increased from SR134.2 billion to SR 205.7 billion during the same period, growing at an average annual rate of 8.9%.
The expansion of the production and investment activity of the private sector along with its developmental contributions during the Eighth Development Plan are regarded as a good indicator of the growing capabilities of the sector in the areas of finance, management, organization, and utilization of investment opportunities. Moreover, the expansion of the sector’s activities represents the fruits of government efforts to enhance the sector’s potential, establishing an attractive environment for investment in different activities. The government continued offering easy-term loans to the private sector through specialized lending funds, provided it with basic infrastructure including development of industrial zones and provided basic services at low prices. In addition, it adopted programs and policies to promote competitiveness of domestic products in domestic and global markets and opened new markets for exports, especially following the accession of the Kingdom to the World Trade Organization (WTO).
An increased role of the private sector in the national economy leads to economic growth, which is more dependent on local drivers (growth in population, employment, productivity and income; as well as consumer and investment expenditures) and less influenced by external fluctuations including world oil markets.
Government expenditure increased continuously during the plan to a level of SR 2322.5 billion, an increase by87.4% and allocations to development sectors reached a level of SR 863.9billion, that is 78% higher than those of the Seventh Development Plan. Their percentage distribution reflected the Plan’s major priorities: human resources development received the greatest share namely 55.6% of the total amounts allocated to the development sectors, social services and health came second with 18%;basic infrastructure came third with14.2%; and the share of the economic resources sector was 12.2%.
3.3 Oil industry in Saudi Arabia
Since the oil industry has transformed Saudi Arabia from a poor desert country to one of the most competitive countries in terms of economy around the world, it is meaningful and significant to discuss and study the oil industry in Saudi Arabia when mentioned the economy of this country. Frankly speaking, the Kingdom of Saudi Arabia is blessed with abundant oil and natural gas resources. According to the OPEC Annual Statistical Bulletin 2013, the proven crude oil reserves of Middle East account for 54.04% of the world’s total oil reserves while the proven crude oil reserves of Saudi Arabia takes up for 33.28% of the total proven crude oil reserves in the Middle East in 2012.

Figure 1:World proven crude oil reserves in 2012 (percent)

Figure 2: Proven crude oil reserves of the Middle East in 2012 (percent)
Speaking of the large proven crude oil reserves in Saudi Arabia leads us to talk about the production of crude oil in this country. Taken as a whole, there is a large fluctuation between 1970 and 1985 in terms of the crude oil production. It increased from an average of 3.8 million barrels per day in 1970 to 8.5 million barrels per day in 1974 and then reached to its peak of 9.9 million barrels per day in 1980. Because of the worldwide decline in oil demand and the emergence of new suppliers such as the North Sea countries and Venezuela, Saudi Arabia reduced its oil production to an average of 4.1 million barrels per day in 1984 and then continued reducing to 3.2 million barrels per day in 1985. However, in general, the crude oil production continued to rise in the next few decades. Production increased to 4.9 million barrels per day in 1986 and then to 5.1 million barrels per day in 1988. Due to the changes in the international oil market and the impacts from the second Gulf War, the production rose to an average of 8.3 million barrels per day in 1992 and remained roughly at the same level until 1998. Saudi Arabia reduced its crude oil production to 7.6 million barrels per day in 1999 in compliance with OPEC’s policy of controlling oil prices. But global demand drives the production to an average of 8.1 million barrels per day in 2000, 8.1 million barrels per day in 2009 and maintained the same level until 2012, as is depicted in Figure 3.

Figure 3: Crude oil production of Saudi Arabia
Development of the oil industry started several decades ago has fuelled the Kingdom’s social and economic development ever since. In 1960, the Saudi Arabian government established the Ministry of Petroleum and Mineral Resources to be in charge of oil, gas and minerals industries. Oil industry in Saudi Arabia is ruled by Arabian-American Oil Company, or Saudi ARAMCO. It is a state-owned company as well as one of the world’s most important oil companies. It is estimated that ARAMCO is worth of $2.2 to $7 trillion in 2010. In 2012, 97.4% of the Kingdom’s total crude oil output was produced by Saudi ARAMCO and the remaining 2.6% were produced by the Arabian Oil Company and Saudi Texaco. Besides owning one of the most important oil companies around the world, Saudi Arabia also plays an active role in the oil market regionally and internationally. It is a founder of Organization of Petroleum Exporting Countries, or OPEC, which aims to increase the crude oil prices produced by its member countries. Figure 4 and 5 indicate the large proportion of Saudi Arabia in terms of values of petroleum exports among the OPEC members as well as the increasing profits gained by Saudi Arabia from the increasing petroleum exports.

Figure 4: OPEC Members’ values of petroleum exports (m $)

Figure 5: Values of petroleum exports as a share of total OPEC, 2012 (percent)
3.4 Private sector in Saudi Arabia
Simply depending on the oil industry will lead Saudi Arabia to an unpredicted future. Therefore, the Saudi Arabian government launched a series of policies as an encouragement and incentive for the development of non-oil sector and private sector in its economy. In Saudi Arabia, the government launches a development plan every five years since 1970, just like China’s five-year plan. The Sixth Development Plan from 1995 to 1999 stated that the government begins to give the private sector opportunities to operate some services ran by the government before, indicating that the Saudi Arabian government would not undertake any economic activity that could be performed by the private sector. The Plan also makes preparations for transferring some industries such as communications and air transportation to the private sector in the near future when the private sector grows strong and competitive enough. It is not only a plan of economic structure adjustment but also a step further to acquire real economic benefits for the Kingdom. The Seventh, Eighth and Ninth Development Plans also aim at increasing the role and status of the private sector in developing another economic pillar for Saudi Arabia.
In 1997, the Council of Ministers’ Resolution defined the objectives of the strategy and policy of privatization in the Kingdom and it established the principles that should be taken into account, in order to achieve these objectives.
1. Enhance the efficiency and competitiveness of the national economy to face regional and international challenges.
2. Encourage private sector investment and its effective participation in the national economy, in order to increase its share in GDP in a manner that would realize growth in the national economy.
3. Broaden participation of citizens in the ownership of productive assets.
4. Encourage national and foreign capital to invest inside the Kingdom.
5. Increase job opportunities and optimal employment of national labor and continue to realize inequitable increase in per captaincies.
6. Provide affordable and timely services for citizens and investors.
7. Rationalize public expenditure and alleviate the burden on the state budget allowing the private sector to finance some services which it can operate and maintain.
8. Increase government revenues through the returns generated by activities that are to be privatized, and the financial returns accruing from granting concessions and from privatization of government shares in projects.
The Council of Ministers’ Resolution stipulated that the Supreme Economic Council would assume the responsibility of supervision, follow-up and implementation of the privatization program along with the required coordination among government agencies and the identification of the targeted activities. A list of such activities would be issued by a resolution of the Council of Ministers while the Supreme Economic Council would develop the privatization strategy and specify a time schedule for its implementation.
The Privatization Strategy issued byte Supreme Economic Council’s Resolution in 2002 aims at privatization of public projects, establishments and services along with ensuring competition therein. The strategy also calls for increasing the size of direct investments as wells management of all enterprises privatized partially or wholly noncommercial basis. It also stresses on facilitating participation of foreign investments in the ownership of facilities and activities to be privatized in line with the measures that govern such matters. Furthermore, the strategy aims at developing the capital market to provide more channels to invest savings in the projects to be privatized.
The privatization strategy highlighted the importance of accelerating the process of reviewing all regulations and procedures related to the private sector. A proper environment should be ensured by streamlining procedures, overcoming constraints, and encouraging the participation of the largest segment of citizens possible. Such participation will be possible through public tendering and adoption of transparent implementation procedures of all privatization processes. In addition, the media should be used to promote all privatization objectives. The strategy also calls for fairly addressing the issue of surplus labor resulting from privatization of the activities. It also works towards establishing an autonomous regulatory body to address social, regulatory and supervisory issues to safeguard consumer interests as reflected in the provision, quality and cost of services. The strategy also calls for evaluation of infrastructure projects and public facilities to determine the feasibility of privatizing such projects and for maintaining the role of the government with regard tithe provision of essential services to citizens.
The privatization strategy established series of implementation policies swell as the necessary mechanisms to realize economic effectiveness, foremost of which are the allowances of any additional government investments in public projects that are approved for privatization. Exceptions to this approach will be limited to essential investments and to funding of maintenance requirements. The privatization strategy further stressed the necessity of reviewing the financial, regulatory and operational status of infrastructure projects in order to rehabilitate those earmarked for privatization and to prepare them for sale by floating tenders. In addition, procedures should be established to ensure that the government gains appropriate, sustainable proceeds from the sale of privatized projects and facilities whenever possible.
Under the encouragement and incentives from these government policies, over the past decades, the value of private sector investment increased substantially from SR 1.2 billion in 1969 to SR 314.1 billion in 2012 with an average annual growth rate of 13.8%. These investments covered a wide range of projects various industries and act like an indicator reflecting the growing role and expanding activities of the private sector in economic and social progress of the Kingdom.

Figure 6: Development of private investments in current prices
In addition, the development of the private sector makes contribution to social employment as well by offering more job opportunities which increased from 1.347 million in 1969 to 8.736 million in 2012. During the period of 1969-1984, employment of Saudi Arabia in the private sector is merely 0.56%. However, as times passing by, the government sector reached its limits of employment, and increasing more job opportunities in the private sector became necessary. Thus the number of workers in the private sector reached to 2.776 million at an average annual growth rate of 3.1% compared with 1.2 million in 1984.
3.5 Health services and the private sector’s contribution
Besides what we have discussed above about the private sector in its economic aspects, it also plays an active role in the public area such as the health services.
Development plans have included several health programs and projects throughout the Kingdom in their drive to expand and improve public health services. Significant achievements were made in this vital field. The Ministry of Health is the major government agency entrusted with the provision of preventive, curative and rehabilitative health care for the Kingdom’s citizens. The Ministry provides primary health care services through a network of 2,259 centers throughout the Kingdom. It also provides specialist curative services through general and specialist hospitals (259 hospitals with 35,828beds).
Military and security institutions provide health services to their staff and to other segments of the general public, while school health units provide primary health care to both male and female students. The General Organization for Social Insurance and the General Presidency of Youth Welfare provide medical services to special segments of the population. The Royal Commission for Jubail and Yanbu provides health services to their staff.
The Kingdom’s universities provide specialist curative services through their specialist medical hospitals in addition to providing medical education and training. They also conduct research in collaboration with other research centers. King Faisal Specialist Hospital and Research Center uses highly advanced technologies and highly qualified international medical experts to provide advanced specialist curative services for citizens whose cases require such care. The research center at the hospital also conducts research in medical fields to fulfill the needs of society.
The Saudi Red Crescent Authority undertakes emergency services throughout the Kingdom in addition unique services for pilgrims and Umrah performers at the Holy sites.
The private sector is paralleling this process by undertaking tasks that complement government services in several health facilities supervised by the Ministry of Health. In 2012 the number of such facilities reached 137 hospitals with about14, 165 beds and 1,944 dispensaries. The number of health employees in the private sector reached 23,344physicians, 28,373 nurses and 10,174assistant technicians. The private sector also contributed to the manufacturing of drugs and medical supplies as well as operation of a number of government health facilities.
During the 1970-2012 periods, the number of hospitals increased from 74 with 9,039 beds to435 with 61,036 beds, while the number of health centers went up from591 to 5,310. This period is also characterized by increase of the total number of physicians from 1,172 to71,383 and the nursing staff from 3,261to 139,701 and the number of supporting personnel (including pharmacists) increasing from 1,741 to76,769.
These achievements have contributed to a substantial improvement in health standards reflected in various indicators: e.g. the significant decline in the infant mortality rate from 118 cases in 1970 to only 16.5 cases per 1000 live births in 2012; the decline in the rate of infectious diseases per 100,000inhabitants to minimal levels (i.e. to zero for poliomyelitis, 0.02 for tetanus and 0.22 for mumps); the increase in life expectancy at birth from about 53 to 73.8 years in2012.
Development efforts continue to promote health facilities and to provide healthcare to all citizens through health programs & projects implemented during the successive development plans. It was thereby managed to achieve a balance between increasing health services and to improve service efficiency.
3.6 Contributions to the GDP from different sectors
Gross domestic product, or GDP, is defined by the Organization for Economic Co-operation Development (OECD), as an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production. Usually, GDP can be taken as the metric of a country in terms of the economic development. Saudi Arabian GDP has increased dramatically since 1974. At current prices, the GDP value went up from about SR 21.7 billion in 1969 to about SR 2666.4 billion in 2012 wile per capita GDP increased from about SR 5.4 thousand in 1971 to about SR 91.3 thousand in 2012 as the result of a succession of development plans.

Figure 7: Development of Nominal GDP & GDP per capital
The proportion of contributions from different sectors to the GDP reflects the economic structure of Saudi Arabia and the main source of economic growth. Typically we consider the oil industry as the economic pillar of Saudi Arabia, but the private sector grows quickly and substantially as what we have discussed in the former section due to the policy of economic structure adjustment. Therefore, it is socially and economically significant to discuss and analyze contributions to the GDP from different sectors in this section.
3.6.1 Contributions to the GDP from oil sector and non-oil sector

Figure 8: Development of GDP by Oil & Non-Oil sectors at 1999 constant prices
As the oil sector plays a key role in accelerating the pace of social and economic development, successive development plans have paid considerable attention to the development and modernization of this sector. Oil sector is the main source not only in financing but also in earning foreign currency needed for imports. Production of crude oil in the Kingdom grew from 3.8 million barrels per day in 1969 to 9.8 million barrels per day in 2012, as is shown in Figure 3. The increase in oil production coupled with the increase in oil prices enabled the oil sector’s real value going up from SR 73.6 billion in 1969 to 234.5 billion in 2012.
Meanwhile, the development plans have also persistently focused on economic diversification. Significant achievements were made in this area and the increasing rate and proportion of non-oil sector depicted in Figure 8 is a good case. During the year from 1969 to 1979, oil sector took up for a large proportion in the GDP growth. However, in the next few decades, contributions from oil sector rose slowly and gradually while contributions from non-oil sector accounted for a lager proportion. Non-oil GDP increased at an average annual rate of 6% over the period 1969-2012, a 12-fold increase. In 2013, non-oil GDP takes up for over 80% of the total GDP while oil GDP accounts for the rest.

Figure 9: Contributions to the GDP from different sectors at 1999 constant prices, 2013 (percent)
3.6.2 Contributions to the GDP from private sector

Figure 10: Private sector production & Share of real GDP at 1999 constant prices
The increasing contribution of the private sector to GDP over the past four decades reflects the increasing role of this sector in the Saudi Arabian economy. The value generated by this sector increased from SR 54.3 billion in 1969 to SR 786.6 billion in 2012, more than 14.5 folds. The sector’s share in GDP reached to 64.6% in 2012 compared with 34.7% in 1969.
3.7 The structure of public financial resources
Since we have discussed on the contributions from different sectors to the GDP growth, it is equally important to analyze the roles of different sectors playing in Saudi economy from the view of the structure of public financial resources.
3.7.1 Government revenues
The First and Second Development Plans were characterized by significant increase in government revenues given increased oil production and higher global oil prices. The total value of government revenues increased from SR 7.9 billion in 1979 to SR 100.1 billion in 1974 and to SR 211.2billion in 1979. The average annual growth rate of government revenues reached 77.6%during the First Development Plan and16.1% during the Second Plan. During the Third Plan period, international oil markets experienced adverse conditions that led to a decline in oil revenues tan extent where the average annual growth rate of government revenues dropped by 4.1%. Total government revenues declined from SR 348.1billion in 1980 to SR171.5 billion in 1984.This decline continued during the Fourth Plan when government revenues reached SR 133.6 billion in 1985 and SR 114.6 billion in 1989, an average annual decline rate of 7.7% over the plan years.
During the Fifth Plan, government revenues increased by an average annual rate of 2.4%, and continued to increase during the Sixth Plan at an average annual rate of 2.7%.Government revenues recorded the highest increase in 1997 reaching SR 205.5 billion, and then declined to SR 147.5 billion in 1999. They increased once again in 2000 to SR258.1 billion at the beginning of the Seventh Plan, due to increase of oil revenues to SR 214.4 billion. In 2001 government revenues stood at SR 228.2 billion, of which oil revenues accounted for SR183.9 billion. In the fourth year of the Seventh Plan, 2003, government revenues reached SR 293billion, of which oil revenues accounted for 78.8%. During the last year of the Seventh Plan, 2004, government revenues reached SR 392.3billion, of which oil revenues were84.1%.
This trend continued during the Eighth Development Plan, which recorded the highest increase in the value of government revenues since the adoption of the state budget system in the Kingdom. Government revenues rose from SR 564.3 billion in 2005 to SR 1101 billion in 2008, the highest level ever reached in the history of the Kingdom. However, due to the global financial crisis, they declined to SR509.8 billion in 2009.With the improvement in the global economy and increase of demand for oil in the world market, the total revenues reached SR 741.6 billion or45.5% up in the first year of the Ninth Plan, 2010. The value foil revenues continued to increase reaching SR 1117.8 billion during the second year of the plan, 2011 and SR 1239.5 billion during the third year, 2012.
3.7.2 Non-oil government revenues
Non-oil government revenues have increased with the increase in economic activity and expansion of the production and service base in the country. These revenues went up forms 818 million in 1970 to 50.2 billion in 1984, and then started to fluctuate to reach SR62.3 billion in 2004 ands 59.8 billion in the first year of the Eighth Plan. In the second year of the Eighth Plan 2006, they increased SR 69.2 billion, and then reach 80.6 billion in 2007 and about SR 117.6 billion in 2008 before dropping to SR 75.4billion in 2009 and to SR71.4 billion in 2010, then resuming to their increase in 2011 to SR 83.4 billion and SR 99.2billion in 2012. This relation fluctuation in non-oil revenues can be attributed to fluctuations in items, such as customs revenues; portend airport service fees as well as selling and renting of real estate. These items have declined in a significant manner since 1984.Fluctuations may also be attributed tithe tax policies which aim at alleviating the tax burden in general.
3.7.3 Government expenditure
Since their early phases, development plans focused on mobilizing resources necessary for increasing economic growth and financing expansion of public services and utilities which aim at raising the standard of living of citizens. Thus, public expenditure in the state budget increased from SR 6.3billion in 1970 to SR 8.1billion in 1971 and increased by more than five folds byte end of the First Plan to reach abuts 35 billion in 1974.They continued to increase to reach SR185.7 billion in 1979, 5.5 times the level in 1974. They continued to increase (reaching SR 216.4 billion in 1984) tonsure continuous finance of the projects needed for improvement of education, health, housing, transport and telecommunication services. These expenditure helped support human development programs and projects and achieve sect oral growth objectives.
The average annual growth rate factual government expenditure during the First, Second and Third Plans were 42.2%, 39.6% and 3.1% respectively. The expansion in government expenditure during the first three plans led to many economic and social achievements. The national economy expanded and acquired new production capacities that were further boosted by construction of modern infrastructure in transport, telecommunications, education, health, housing, agriculture and industry.
During the Fourth Plan, government expenditure declined by an average annual rate of 6.5%. This decline resulted not only from the decline of government revenues, but also from completion of most infrastructure projects. Government expenditure decreased from about SR 184 billion in 1985 to SR 154.9 billion in 1989. Since 1990, government expenditure fluctuated, although moderately, then increased in 2000 to SR 235.3 billion, and SR 255.1 billion in 2001. In 2003, actual government expenditure reached abuts 257 billion, then increased in 2004 to SR 285.2 billion. They continued to increase in the five years of the Eighth Plan and the first year of the Ninth Plan to reach SR346.5 billion in the first year 2005, SR 393.3 billion in the second year 2006, SR 466.3billion in 2007, and SR520.1 billion in 2008, SR 596.4 billion in 2009, and SR 653.9 billion in 2010. Then, this expenditure amounted to SR 826.7 billion in 2011Gat a growth rate of 23% and reached SR853 billion in 2012.
3.7.4 Government credit institutions
The development plans have placed emphasis on the provision of soft loans to the citizens and the national private sector, in order to increase investments in all sectors of the economy. This policy contributed to supporting industrial and agricultural development, as well as activities of the service sector. As a result, the private sector’s investment has expanded in several fields, such as private hospitals, clinics, hotels, bakeries, domestic and foreign trade, transport and telecommunications and so on. Furthermore, these loans played a major role in the development of the real estate sector, particularly the provision of housing, acceleration of urban development, modernization fold residential areas and addition of new residential and commercial complexes that absorb the increasing population and meet the needs of development.
The cumulative value of loans provided by specialized government credit institutions up to the end of 2003 reached about SR 317 billion, which increased to SR 322.8 billion in 2004, SR 333.1 billion in 2005, SR 344.8 billion in 2006, SR 363.6 billion in 2007, SR 395.1 billion in 2008, and SR 429.3billion in 2009, SR 456.4billion in 2010, SR 501.7billion in 2011, and SR565.4 billion in 2012.
Among the key specialized funds in this area is the Real Estate Development Fund (REDF), which was established in 1974 with a view to finance individuals and establishments building real estate projects for personal use as housing, or for commercial purposes, such as private hospitals, hotels and bakeries. The Fund played a major role in the development of the real estate sector and the expansion of property ownership. Red’s contribution to provision of developmental loans camion top of the contribution of other government credit institutions. The value of loans extended by REDF for construction of private houses and investment buildings reached SR 130.5billion through 2003, then increased to SR 132.2 billion in 2004, SR 136.2 billion in 2005, SR 141.3 billion in 2006, SR 146.5 billion in 2007, SR 151.9 billion in 2008 and SR 158.2billion in 2009, SR 164.9billion in 2010, and SR179.2 billion in 2011.The value of total loans increased substantially to SR 204.9 billion in 2012, being ranked first in terms of the value of loans provided by specialized government credit institutions.
The Fund started its operation with capital of SR 250 million, which was increased to SR 73.8 billion in 1992. It continued to rely on its own resources in the provision of loans until the fiscal year 2002 when its capital was raised ban additional SR 2.0 billion. The Fund’s capital was again raised by SR18 billion from the surplus of the 2004 and 2005 budgets. It received additional support from the 2009 budget amounting to SR 25 billion to be disbursed during the coming five years.
To demonstrate the important role of the Fund in the real estate development process, it is worth mentioning that it has 25 branches and offices and its services covering 4279 cities, villages and hamlets. Since it started in 1974 and through 2012, the Fund extended about 700,000 private and investment loans at a value of SR 213 billion, of which SR 184 billion (93%) were disbursed, contributing to the construction of about 866,000 housing units. Moreover, the Fund provided about 697,000 private loans with value of SR 208 billion which contributed to the construction of about837, 000 housing units over the same period. It also provided about 2,488investment loans at a value of SR 5.2billion which contributed to the construction of 29,390 housing units, 5,159 commercial stores and 2,857 offices. It also distributed 20,444 units of its housing projects as a substitute for cash loans in various regions of the Kingdom.
The Public Investments Fund (PIF) ranked second in terms of the value of loans extended to the private sector and to individuals through 2012, which amounted to SR 149.4 billion, or 26.4%of total loans provided by government credit institutions up to that year. Their, which was established in 1971, assumed an important role in financing commercial activities of government enterprises. The value of annual loans provided by the Fund to public and quasi-public enterprises increased from SR 603 million in1974 to SR 3.7 billion in 1984, then declined to SR6 million in 1993. In 2000, the value of these loans went up to SR 1.1 billion with emphasis placed on modernization processes, increase in production capacities and upgrading competitiveness of basic industries. The value of these loans increased appreciably during the Eighth Plan, from SR 2.6 billion in 2005 to SR 15.5billion in 2009, and amounted to SR 9.3 billion in the first year of the Ninth Plan, and SR 9.1billion in the second year and SR 24.1 billion in the third year of the Ninth Development Plan.
The Saudi Industrial Development Fund (SIDF) was established in 1974 for management of finance programs for electricity companies, and finance of cold stores and dates processing for a specific period of time. It continued extending loans to national and foreign industrial projects based on a number of investment criteria, such as adequate return, high value added, import substitution, enhancement of exports, achievement of industrial integration, provision of job opportunities to Saudis, use of domestic raw materials and transfer of advanced technology. The Fund ranked third as it extended loans amounting to SR 108.7 billion, or19.2% of total loans provided by government credit institutions up to 2012. The government raised the capital of the Fund by SR 13billion from the budget surplus of 2004 and 2005 budgets.
The Agricultural Development Fund extends interest-free short and medium term loans for agricultural investments as well as subsidies to farmers to support the cost of agricultural inputs including machinery, pumps, poultry production equipment and transporting cows. The Fund extended loans at atonal value of SR 44.2 billion or 7.8%of total loans of all these institutions unto 2012.
Other government institutions provided loans at a value of SR 58.1 billion or10.3% of total loans provided by government credit institutions up to 2012.
3.7.5 Government subsidies
Government direct and indirect subsidies contribute to improving the social aspects of the development plans and are considered as a prerequisite for raising the standard of living and improving the quality of life of low income citizens and the poor.
Social subsidies, provided by the government since 1970, amounted to SR 49 million in that yearend increased steadily to reach SR 12.9billion in 1988. Then their value declined to SR 10.3 billion in 2004. In the last year of the Eighth Plan, 2009, their value reached SR 23.6 billion bandit reached SR 28.4 billion in the first year and SR 29.7 billion in the second year and SR 31 billion in the third year of the Ninth Plan. This brings the total value of subsidies provided by the government over the past 44 year’s to 406.9 billion.
As part of the support of private economic activity, development plans supported farmers by subsidizing domestic production of wheat and barley, electricity and public transportation. Subsidies provided to farmers amounted to SR 68.5 million in 1974 and increased to SR1.5 billion in 1984, then declined to SR 22.9 million in 1995. The value of these subsidies increased once again in 2000 to SR 266.5 million and to SR 287.4 million in 2001, then to SR 296.2 million in the last year of the Seventh Plan, and to 91.1 million in the last year of the Eighth Plan, 2009, SR92.8 million in the first year and SR93.6 million during the second year ands 93.6 billion during the third year of the Ninth Plan 2012, bringing total subsidies provided up to that year to SR 17.1 billion. Subsidies for production of domestic wheat and barley increased from SR 45.2 million in 1979 to SR 3 billion in 1984 and declined to 1.8 billion in 2000, then to SR 0.8 billion in 2005, SR 574.6 million in the last year of the Eighth Plan. The value of these subsidies reached SR 599.6million in the first year of the plan ands 1.05 billion in the second year of the Ninth Plan, bringing total subsidies provided to production of wheat and barley up to 2012 to SR74.8 billion.
Subsidies provided to electricity companies went up from SR 2 million in 1974 to SR 2.8 billion in 1984, and then fluctuated before reaching SR 210 million in 1994, a level maintained up to 1996. The value of these subsidies increased substantially to SR 746 million in 1997 then returned to SR 210 million in 1998 and 1999. That value declined to SR 70million in 2000 following an electricity tariff reform policy which took into consideration social dimensions when setting tariffs follower consumption brackets. This brings the cumulative value of subsidies provided to electricity companies over the period 1973-2012 to about SR23.3 billion.
With regard to indirect social subsidies, government food price support increased from SR 750 million in 1974 to SR 1.5 billion in 1979 and to SR 2.6 billion in 1984. However, the value of this subsidy declined substantially to SR 7.7 million in 1999. It then increased to 20 million in 2004 and SR 26.7 million in 2005, then declined in 2006 to SR 14.6 million and in 2007 to SR 12.2 million, then rose substantially to SR 758.3million in 2008, reaches 1.1 billion in 2009, and reached SR 915.7 million in the first year and SR 475.4 million in the second year, and SR 240 million in the third year of the Ninth Plan 2012, thus bringing total cumulative subsidies provided in this area to abuts 25.7 billion.
Social security subsidies increased from SR 49 million in 1970 to SR 1.5 billion in 1984, increased again to SR 2.5 billion in 1993 and SR 3 billion in 2002, and increased to SR 13 billion in 2009, and SR 15.2 billion in the first year and SR 21.2 billion in the second year and SR 20.9 billion in the third year of the Ninth Plan 2012, thus bringing the total value of these subsidies between 1970 and 2012 to about SR 162.4 billion. The development of social support and subsidies provided to citizens reflects the continued attention given by the government to the social dimensions of development.
3.8 Foreign trade in Saudi Arabia

Figure 11: Development of foreign trade with respect to oil & non-oil exports (SR billion & %)
Figure 12: Saudi Arabian imports & exports by nature of items in 2012 (percent)
The Kingdom’s foreign trade over the past decades displayed rapid growth due to the acceleration of economic growth both at the macro and micro levels. The value of total merchandise exports went up from about SR 10.91 billion in 1970 to SR 1465.5 billion in 2012. Although what we have discussed indicates the impressive progress of the private sector in Saudi Arabian economy, oil is still the main export product in the Kingdom’s foreign trade. On the one hand, in average, from 2007 to 2013, the proportion of oil exports in total merchandise exports is 86.83% while the export of oil contributes 45.53% of the total GDP to Saudi Arabian economy; on the other hand, raw materials take up for 81.2% of the total exports while finished products account for 66.4% of the total imports. That demonstrates the unbalanced economic structure in Saudi Arabian foreign trade: export being over reliant on raw materials such as crude oil and domestic private sector being too week to compete globally, as well as the role of foreign trade to the Kingdom’s economy.
3.9 FDI in Saudi Arabia
Before discussing about the FDI in Saudi Arabia, we need to briefly analyze the economic conditions and environment of the Middle East and North of Africa (MENA). Generally speaking, MENA countries were born with great amounts of crude oil reserves and strategic location. However, these countries have a high unemployment rate, less developing economies, weak institutions and low level of abilities to get engaged into global market and competition. Therefore, it is strategically significant to develop a diversified economy under the development and stimulus of oil industry such as the Kingdom of Saudi Arabia, and FDI could also be one of the stimulus factor for developing these countries’ economy. FDI attractiveness is different among these countries. Some of them are considered to be successful like United Arab Emirate coming after Turkey. Egypt comes in the third and Saudi Arabia is the forth.
The oil industry has made great contributions to Saudi Arabian economy. Meanwhile, the Saudi government faced serous challenges to overcome its over reliance on oil revenues. The results are the establishment of Arabia General Investment Authority (SAGIA) and the new Foreign Investment Act issued in 2000. SAGIA was founded by the Saudi government on April 10th, 2000, acting as a part of measures towards formalizing the process of economic liberalization. It aims at achieving economic growth by creating a professional business environment, providing services to investors and fostering investment opportunities in key sectors including energy, transportation, ICT, health, and knowledge based industries. During the past decade, SAGIA has eased the way for Saudi Arabia to have a well start in business environment.
Before 2000, FDI in Saudi Arabia was controlled by 1979 Foreign Investment Act which gave local companies and joint ventures priority of making business in Saudi Arabia, forbidding foreign companies to invest in some specific sectors. It directly leads to the deterioration in FDI inflows. However, things were changed in 2000 when the Saudi government launched the new Foreign Investment Act which enables foreign companies to invest in Saudi Arabia under the three conditions. First, the project from foreign investors is required to be a development project and has to be related to one of these sectors: agriculture, health sector, industrial sector, specialized service projects and contracting. Second, the project needs to enhance technological transfer from home countries to the host country. Third, the project has to be shared with a Saudi Arabian partner owning at least 25 percent of the equity. For the third item, it can be compromised when necessary.
Table 1: FDI inflows by country in the West Asia, 2007-2012 (Millions of dollars)
‘ 2007 2008 2009 2010 2011 2012
Bahrain 1756 1794 257 156 781 891
Iraq 972 1856 1598 1396 2082 2549
Jordan 2622 2826 2413 1651 1474 1403
Kuwait 111 -6 1114 456 855 1851
Lebanon 3376 4333 4804 4280 3485 3787
Oman 3332 2952 1485 1243 739 1514
Palestinian Territory 28 52 301 180 214 244
Qatar 4700 3779 8125 4670 -87 324
Saudi Arabia 24319 39456 36458 29233 16308 12182
Syrian Arab Republic 1242 1467 2570 1469 – –
Turkey 22047 19760 8663 9036 16047 12419
UAE 14187 13724 4003 5500 7679 9602
Yemen 917 1555 129 189 -518 349
Total West Asia 79609 93548 71920 59459 49059 47115

Figure 13: The development of Saudi Arabian FDI inflows, 2003-2012 (millions of dollars & %)
With SAGIA’s efforts and 2000 Foreign Investment Act creating an easing environment, enhancing the attraction to FDI in Saudi Arabia, this country has achieved great success in recent years, especially from 2007 to 2011 when Saudi FDI inflows accounted for over 30% of the total regional FDI consecutively. Table 1 shows FDI inflows by country in the West Asia. From 2007 to 2012, in average, FDI inflows of Saudi Arabia takes up for 38.61% of the total regional FDI inflows and ranks the first position of attracting FDI in the West Asia. Turkey ranks the second (22.52%) while United Arab Emirates ranks the third (13.89%). In addition, the Kingdom’s FDI inflows proportion fluctuate dramatically between the period of 2003-2006 and the period of 2007-2012. The minimum proportion was 2.7% in 2006 while the maximum was 50.69% in 2009.
3.10 Economic cities in Saudi Arabia
In a macro aspect, the development of a country can be measured by its GDP growth. Meanwhile, in a micro aspect, all the achievements and accomplishments of a country can be reflected in several economic cities, just like the open zone in China. Therefore, in this section, we will introduce three economic cities in Saudi Arabia in order to reflect Saudi’s development performance in a micro view, including two industrial cities, Jubail and Yanbu, and one science and technology city, King Abdul Aziz.
3.10.1 Jubail Industrial City
Jubail industrial city covers an area of16, 062 square km and its population was estimated at around 114,700 by the end of 2012. Jubail industrial city has become ready to accommodate more basic, secondary and supporting industries. Vast areas of land were leveled. Residential quarters were established for employees and about 19,100residential units were built, of which about 12,300 housing units we reconstructed by the private sector.
In order to make this industrial city self-sufficient in basic needs, particularly in water, adequate funds were allocated to increase the productive capacity of water desalination plants to 375 thousand cubic meters per day. The length of the main water network reached around 1,443 km by the end of 2012, and the capacity of sewerage and industrial wastewater treatment networks reached 117thousand cubic meters per day (42thousand for the wastewater treatment plant and 75 thousand for the sewerage treatment plant). The length of the sewerage network reached 1, 811 kilometer.
The Royal Commission for Jubail and Yanbu has installed an electricity network with a length of 5,707 km and the Saudi Electricity Company (SEC), Eastern province, is supplying power. A system of telephone exchanges with a total capacity of60,000 lines was also completed and25,529 telephone lines were installed, and the network length reached about863 km. Infrastructure was completed with the construction of 1109 km of main and express roads. An airport, with a total area of 4650 square meters, including terminals and tourism facilities, has been established. Currently, there are 23berths at the industrial seaport.
With respect to the provision of necessary health care to the city’s population, 3 hospitals were established in addition to 3 clinics and 3primary health care centers, which are now in operation. Furthermore, 47mosques as well as 22 Friday congregation mosques have been constructed.
Within the context of man power development and the provision of the necessary skills needed for anticipated industrial development, the Jubail Industrial College, Jubail Technical Institute and a college for women and another for men were set up; the number of graduates reached 2,040through 2012.
By the end of 2012, a large number of plants were operational: 27 basic industry complexes, 29 plants in secondary industries (using products of basic industries) and 232 plants in support and light industries.
3.10.2 Yanbu Industrial City
Construction of Yanbu Industrial City and its modern residential facilities on an area of 185 square km has been completed. Its population is estimated at 163 thousand by the end of 2012.
21,589 housing units (including rooms for laborers) were completed. The city has a storage capacity of460,000 cubic meters of water for drinking and industrial purposes; a water distribution network of 547 km; a sewerage treatment plant with a capacity of 27 thousand cubic meters per day in the residential area; an industrial wastewater treatment plant with a capacity of 24 thousand cubic meters per day; and a waste water network of 538 km. The production capacity of cooling water plants increased to 640 thousand cubic meters per hour. In addition, electricity generation capacity at the Electricity and Water Plant raised to851 megawatts and the length of the power distribution network reached744 km. Finally, the length of the city’s road network totaled 668kilometer.
As in Jubail, a large number of industrial plants were operational by 2012: 14 in basic industries, 20 in secondary industries and 70 in light and supporting industries.
3.10.3 King Abdul Aziz City for Science and Technology (KACST)
During the fiscal year 2012, King Abdulaziz City for Science and Technology (KACST) has continued its activities and achievements in many areas and scientific and technological programs. The most important achievements realized are as follows:
KACST held workshops and conferences related to the activities of the National Plan for Science, Technology and Innovation. In the third international forum for advanced technologies the activities included: the second workshop for science and technology units, the Saudi forum for intellectual property, the Saudi international forum for environmental technology, the second forum for petrochemicals, the first introductory workshop for Internal Portal in Riyadh, the second introductory workshop for the Internal Portal at King Abdul-Aziz University in Jeddah.
KACST has established two joint centers of excellence, one for genomic research and another for wireless broadband communication applications.
With a budget of SR 300 million, KACST supported 175 research projects as part of its strategic technology program under 11th batch. KACST has also finished working on the development of a vision to establish a program for university essential facilities. Presently the work is under way to develop mechanisms to commence the implementation of this program.
KACST continued offering grants for applied research in the fields which serve the Kingdom’s economic, social and regional development. The agreed average was 65 researches per year during the 9th Development Plan. However, during this period, the number of proposals actually submitted reached 393 researches; the number of accepted research proposals was91 while 302 research proposals were rejected. Due to the large number of research proposals and the increase in quality, support rate has been increased by 40% above the plan target. Establishing new universities was the main reason, which lead to this increase in research proposals and hence in research support rate.
With an average of 30 researches per year during the period of the 9thdevelopment plan, KACST continued offering grants for small researches. However, 101researchproposals were submitted, the number of the accepted research proposals was 40, while 61 research proposals were rejected. Due to notable increase in the number of research proposals the support rate was increased by 33% above the plan target. It was agreed to produce on an average 150 research proposals per year during the 9thdevelopment plan. KACST offered grants to postgraduate researches which serve the technological development in the Kingdom. 613research proposals were submitted, of which 592 research proposals were accepted, while 21 research proposals were rejected. The support rate was increased by 400%above the target mainly because of the expansion in universities and the increase in students’ desire to obtain postgraduate degrees.
During the 9th Development Plan period, on average the KACST’s support for human sciences researches which serve the Kingdom’s economic development reached 35 researches per year. However, 52 research proposals were submitted, 7 research proposals were accepted, while 45research proposals were rejected. The reason behind the declining rates the mechanism of support in this program which is limited to seven announced priorities. Under each priority only one research is supported.
During 2012, the number of documents entered in the Arabic and English data-base reached 5671. During that period Arabic documents were entered, while the total of Arabic documents entered reached 50,224. The number of entered English documents during that period reached 2830,while the total number of English documents entered reached 79,905.In addition, 14,251 terms were entered in the Saudi Terminology Data-Bank “BASM”. Thus, the total of BASM content has become512,372 multi-lingual terms. KACST library also subscribed to335 scientific magazines of which, 234 are in English and 101 are in Arabic. In addition, 516 books were added to the library and the total of available books has become 25,205of which 10,503 are in Arabic language. Moreover, 26 statistical reports have been added in Arabic language so the total statistical reports have become 1326.Similarly, 289 dissertations were added thereby the total number of dissertations reached 3225. Likewise, 13,000 bibliographic records were added to the database of Arabic scientific books while the total has reached to 70,000 records. In addition, a total of 8807researchers have been provided with15, 512 documents. As for electronic publications, the library has added1, 312 English e-books, 143 English-magazines and the total have reached to 24,097 while 117 Arabica-magazines have also been added so the total has moved to 529.
In line with the idea of adopting national programs in media to raise the awareness about the importance of science and technology to the development, in cooperation with the Ministry of Culture and Information, launching of a TV program entitled (ABHATH) has-been approved. A general vision of the program including the episodes of the first and the second terms of the program was completed. Shooting of the program is currently underway in cooperation with thesauri TV. The program was created to acquaint with various research achievements and projects realized by KACST. Many interviews, reports and cover stories on KACST’s achievements and projects were published in regional and local press.
Intellectual property is among the KACST’s top investment priorities. In this regard KACST received 910patent applications and 592industrial design certificate applications while it granted 197patents and 560 industrial design certificates. In addition, it conducted 252 initial researches for those seeking to find documents related to their inventions. Moreover, KACST participated in the world intellectual property day and in national and international conferences, meetings and exhibitions. KASCT has launched a website especially for patent applications and patent related subjects. It comes as a part of KACST’s interest in the intellectual production of scientists and innovators as well as providing them with proper channels to introduce their intellectual creations.
Moving and safe-keeping of sand filters contaminated with radioactive materials generated by drinking water purification plants tithe National Center of Radioactive Waste Management, in accordance with the royal directives in this regard. Also, relocating and safe-keeping of radioactive resources in the atomic energy generators at the Presidency of Meteorology and Environment and the National Center of Radioactive Waste Management.
KACST continued its efforts in establishing technology incubators. In this regard, it contributed in the establishment of SME’s technology companies. It aims at technological development and adaptation in the Kingdom along with diversification of income resources and creation of more job opportunities for the Saudi youth. Moreover, Badir Program for technology incubators has earned the ISO 9001. In addition, National Prawn Company signed a contract with Dr. Khalid Al-Robe’an, the biotechnology incubator at KASCT’s Badir Program.
In the area of space imagery reception, 5,518,000 sq. km of space images have been received through the French Satellite SPOT while 13,213,000 were distributed. 4,413,864 sq. km of imagery were distributed from the American satellites (Land-Sat). Moreover, 22,700 sq. km of space images were distributed from the Canadian satellites (Radar-Sat). Besides, 444,213 sq. km of space images were received from the American satellites (IKONOS) while about62,985 sq. km of space images was distributed.
60% of King Abdullah Initiative for Arabic Content has been achieved and an Arabic search engine has also been accomplished.
Chapter4 Methodology of the Study
4.1 Introduction
It is necessary to support this thesis with an empirical study on the role of FDI in Saudi Arabian economy. Former studies have shown the positive relationships between FDI and economic growth. Therefore, my empirical study should be divided into two steps. One is a test analyzing the causal relationship between FDI and economic growth in Saudi Arabia. The other one is a simple regression investigating the role of FDI in Saudi Arabian economy both from the long term and the short term. The simple regression equation also introduces two other economic variables so that the role of FDI can be better compared.
4.2 Causality Test
Granger causality is an econometrics concept testing the causal relationship between two variables. For example, the GDP growth can stimulate the growth of consumption and vice versa. Granger designed a simple linear regression model test process to analyze whether the growth of consumption in the past results the present GDP growth or the past consumption growth results the present GDP growth and at the same time, the past GDP growth leads to the present consumption growth. More complex extensions to nonlinear cases exist but they are often more difficult to apply in practice.
In order to test the causality relationship between FDI and economic growth, we perform a Granger causality test model as the following two equations:
(1)
(2)
In these equations, and are the GDP and FDI of the year , and are the intercepts, and are noise error terms, and is the maximum lag length used in each time series. If is significantly different from zero, then we conclude FDI Granger causes GDP. Separately, if is significantly different from zero, then we conclude GDP Granger causes FDI. The causality test here is based on the data from 1970 to 2010.
4.3 Simple Regression
After the causality test, there is an Ordinary Least Square regression to analyze the impact of FDI on the economic growth compared with other two variables: oil prices and foreign trade openness, as is depicted in the following equation.
(3)
Since this step is analyzed from two aspects: the long term and the short term, the simple regression here is based on data from two period of time: the long term is from 1970 to 2010 while the short term is from 2005 to 2012.
Chapter 5 Empirical Study
5.1 Data Definition
5.1.1 Gross Domestic Product (GDP)
Gross domestic product is an economic indicator measuring not only the economic performance of a country but also power and wealth of the country and it is the dependent variable in the equation (3). Gross domestic product is written as GDP in our empirical study. It can be divided in to nominal GDP and real GDP. Real GDP is the GDP which gets rid of the influence from the domestic inflation. Because other independent variables do not filter out the inflation factor, the GDP here refers to nominal GDP.
5.1.2 Foreign Direct Investment (FDI)
Foreign direct investment has been described as a process where an investor from a certain country obtains the ownership of assets in another country in order to make profits or acquire scarce productive resources. It follows the transferring financial resources, technologies and other human capitals from home countries to the host country. Saudi Arabian FDI inflows grow quickly and dramatically in the past decade and take up for a large proportion in the West Asia. Foreign direct investment is written as FDI here.
5.1.3 Oil price (OIL)
As the Kingdom of Saudi Arabia is a country blessed with large crude oil reserves and oil industry makes a lot of contributions for Saudi economic growth, oil price is a key factor on the Saudi economy which cannot be neglected. Oil price is written as OIL in the empirical study.
5.1.4 Foreign trade openness (OPEN)
Saudi Arabian economy is heavily reliant on its oil industry. It has a strong ability in the field of crude oil production. However, there exists a domestic oversupply of crude oil and oil products. Therefore, export the precious resources to overseas market is a reasonable choice for the Saudi government. Actually, from the statistics and analysis in Chapter 3, it is found that Saudi Arabia has the biggest value of petroleum exports among the OPEC members and, oil products are still the main exports in Saudi Arabian foreign trade. Foreign trade plays a vitally important role in Saudi economy. It is measured by foreign trade openness, as is depicted in the following equation, and written as OPEN.

(4)
5.2 Results of Causality Test
5.2.1 Stationary Test
As macroeconomic time series data are usually non-stationary, a stationary test is needed before the Granger causality test. I carry out the stationary test by ADF unit root test and the results are presented in the following table.
Table 2: ADF test results
Variables ADF test Decision
LGDP I(1)* Integrated at 5% significance level
LFDI I(1)** Integrated at 5% significance level
LOIL I(1)** Integrated at 5% significance level
LOPEN I(1)* Integrated at 10% significance level
Notes: * and ** denote respectively significance at 10% and 5% significance level
As is reported in the above table, the unit root tests on the levels of each variable reveal non-stationary for all variables. Therefore, Granger causality test can be performed.
5.2.2 Granger Causality Test
Former studies have shown the positive relationship between FDI and the economic growth. However, here is another extensive question: which variable causes the changes of the other one? The results of Granger causality test using relevant data of Saudi Arabia from 1970 to 2010 both confirm the positive relationship and the causality direction between the two variables. It is reported in the following table.
Table 3: Granger test results
Null Hypothesis: F-Statistic Probability
FDI does not Granger Cause GDP 16.8715 1.60E-06
GDP does not Granger Cause FDI 5.22143 0.00526
We can conclude from the table that, on the one hand, we fail to reject the hypothesis that GDP does not Granger cause FDI because the probability is less that 5 percent; on the other hand, we fail to reject the hypothesis that FDI does not Granger cause GDP either because of the same reason. It seems then there is a bi-directional influence between the two factors. FDI inflows causes the GDP growth and vice versa. Since this thesis is dedicated to study the role of FDI in the economic growth, we emphasize more on the impact of FDI on economic growth.
5.3 Results of Simple Regression
5.3.1 Results from the long term data
In this section, we will perform a regression analysis by equation (3) from the long term based on the data from 1970 to 2010. Economic growth is the dependent variable measured by GDP while FDI is the independent variable. There are also two other dependent variables, OIL and OPEN, which are used to compared with FDI in terms of the impact on economy. The results are shown in the table and expressed by the equation below.
Table 4: Regression analysis from the long term
Variable Coefficient t-Statistic Prob.
FDI 2.0538 2.516842 0.0099
OIL 2.5409 6.152315 0.000
OPEN 0.678845 1.820153 0.0812
(5)
R-squared of this regression is 0.838, meaning that equation (5) can be a good explanation of Saudi Arabian economy. As for FDI, it is positive with a coefficient of 2.05 and statistically significant at 1 percent significant level. Oil price and foreign trade openness are positive to the Saudi economy as well. As expected, oil revenues are playing a bigger role in boosting the Saudi economy, while FDI inflows are the second position and foreign trade openness is the third.
5.3.2 Results from the short term
From the long term, oil revenues, FDI inflows and foreign trade openness do have a positive influence on the Saudi economy, which supports the policy of attracting more FDI inflows and develop the private sector in the long term. However, regression analysis from a short term may reflect the economic performance during a certain period. Therefore, in this section, a regression analysis from the short term is given (2006-2012). Table 5 shows the results.
Table 5: Regression analysis from the long term
Variable Coefficient t-Statistic Prob.
FDI -0.51196 -2.263118 0.1086
OIL 6.021202 42.29885 0.000
OPEN -4.944095 -9.723823 0.0023
R-squared of this regression is 0.998, meaning that the results is a good explanation of Saudi economy from 2006 to 2012. However, the most significant difference from the long term regression analysis is that FDI inflows do not have a positive influence on the Saudi economy as well as the foreign trade openness. Meanwhile, the oil revenues’ role in Saudi economy is increasing with coefficient rising from 2.5409 to 6.0212.
5.4 Conclusions of the empirical study
In this chapter, first of all, we analyzed the causal relationship between FDI inflows and the economic growth by using Granger causality test based on the long term data, 1970-2010. Then, a simple regression was given to figure out the role of FDI inflows in the economic growth compared with the other two variables both from the long term and the short term. Thus, the empirical study above is concluded from two aspects below.
First, there exists a bi-directional influence between FDI inflows and the economic growth measured by GDP. FDI inflows stimulate the economic growth while a stronger economy means attracting FDI inflows in a higher level.
Second, from the long term analysis, FDI inflows, oil prices and foreign trade openness are all positive to Saudi economic growth. FDI inflows, as well as oil prices, are almost equally important for Saudi economic growth while foreign trade openness seems relatively less important. However, from the short term analysis, during the period of 2006-2012, oil prices is the only variable that stimulate the economy and take up for a large proportion of economic contribution while the other two variables are negative to Saudi economic growth. We will discuss the possible reasons for this phenomenon in Chapter 6.
Chapter 6 Conclusions and Recommendations
Firstly, the Kingdom of Saudi Arabia is a country with a strong oil industry around the world. It ranks the first position in terms of crude oil reserves around the world and the crude oil production is increasing in recent years. Saudi Arabia is also a member of OPEC. In 2012, it accounted for over a quarter of the total values of petroleum exports among OPEC member countries.
Secondly, there is a rapid growth in non-oil sectors and private sectors of Saudi Arabia in recent decade. In 2013, the contributions from non-oil sector take up for over 80% of the total GDP. However, from the view of Saudi Arabian foreign trade, it is still a country exporting raw materials and importing finished products. Oil products are still the main exports in Saudi Arabian foreign trade.
Last but not the least, FDI inflows do make a positive contribution to the economic growth and stimulate Saudi economy from the long term, as well as the oil revenues from both local oil industries and foreign trade. But from the short term, FDI is not bound to stimulate the economy, as the results indicated in the above empirical study based on data from 2006 to 2012. Since the establishment of SAGIA and the new Foreign Investment Act launched in 2000, Saudi Arabia became more attractive for FDI, and the FDI inflows keep increasing until 2008, when the financial crisis broke out. In the next few years, FDI inflows to Saudi Arabia, as well as its proportion of FDI inflows, is decreasing. It seems that Saudi Arabia is losing its attraction for FDI and is coming back to the time when oil industry and oil exports are the only pillar for its economic growth. As a result, FDI inflows have a negative impact on the economic growth during the period of 2006-2012.
Recommendations are given according to the conclusions in the following aspects.
From the aspect of the economy, the development of non-oil sectors and private sectors is still the main target for Saudi government. Simply depending on the oil industry will lead Saudi Arabia to an unpredicted future. But, measuring the development of the two sectors by their contributions to GDP is not enough. The government must try the best to make its non-oil industries and private industries more competitive in the global market, thus reverse the current condition where exporting raw materials and importing finished products.
From the aspect of the policy, even though there exits negative relationship between FDI inflows and the economic growth in recent decade, it is just the influence from the financial crisis. FDI inflows do stimulate the economy from the long term. Therefore, enhancing the FDI attraction level by creating a better and easing investment environment in Saudi Arabia should be another target for Saudi government.

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